Post on 10-Mar-2020
JM Financial Institutional Securities Limited
Trim midcaps; Tactical overweight in IT services
Over the past month, the broader market rose another 1.7% and is now up
10.8% YTD as net FII inflows topped US$1.5bn for the month and to US$4.8bn
YTD. As is well articulated by now, the 12m forward market PE at 17.7x
remains supported more by compression of cost of capital than growth reset.
In 1QFY17, the PAT for Nifty grew by 9% YoY (ex. financials at 14%) vs. 1% in
4Q16 and above muted expectations but still fell short of the double-digit
run rate expected for the full year. Earnings growth was strong in materials
(cement), industrials (Eicher, improving T&D), pharma and oil & gas and came
in lower than estimated in financials ex-NBFCs (-2%), IT services and in
telecom (-18%). Our recommended, bottom-up, model portfolio continues to
recommend heavyweight in private financials (banks and NBFCs), domestic-
centric healthcare, and consumer discretionary (2-wheelers), while
maintaining tactical overweight in IT services, primarily through Infosys. In
view of recent performance, we recommended removing weight from Titan
(3% weight to 0%), Cholamandalam Finance (2% to 0%), Techno Electric,
Ashoka Buildcon (0.5% to 0%) and adding to cash (3.3% to 9.3%)
Performance of JM portfolio, winners/losers: Since inception in Jan’15, our
model portfolio has outperformed the Nifty by 14.5% (excl. transaction costs)
with highest contributors being financials (35% wt/39% return) and consumer
discretionary (10%/30%) even as IT (17%/-5%) and consumer staples (5%/-5%)
dragged it down. The best performers were Bajaj Finance (220% holding
period returns) and Bajaj Finserv (136%) while the bottom two are TechM (-
27%) and IPCA (-26%). YTD, the model portfolio has outperformed by 420bps
with Bajaj Finance and HDFC Bank being highest contributors. 1.
Earnings ahead of toned down estimates in Q1FY17: 1Q17 Nifty earnings
(PAT) grew at 9% YoY (ex. financials at 14%) recovering from the lows of ~1%
in 4Q16 (due to high credit costs for financials). Earnings growth was strong
in materials (cement), industrials, pharma and oil & gas. PAT, however,
declined for telecom (-18%) and financials (-2%) during the quarter. For JM
coverage, earnings grew at 10.8% YoY (ex. financials at 17%) and recovered
from a 9% decline in 4Q16 with similar trend across sectors. The
Beats/Misses ratio stands at 110% (vs last four-quarter average of 76%) with
strong results in NBFC( 6/2), Metals (3/1), Utilities (2/1) and Media (1/0)
while Pvt. Banks (1/3), SOE banks, Midcaps and IT (2/4) lagged.
Telecom auctions key to govt. capex in 2HFY17: YTD, the fiscal deficit
stands at `3.94tn (2.6% GDP/73.7% FY17BE) vs. `3.85tn (2.8% GDP/69.3%
FY16BE) in FY16 on healthy growth in revenue receipts (22% YoY) vs. nominal
total expenditure (9.3% YoY). The revenue generation is boosted by the
healthy net tax revenue (44% YoY), while non-tax revenue actually fell (-38.2%
YoY). The government seems to be taking a cautious approach as far as
spending goes with capital expenditure declining 17.1% YoY that we expect
to be corrected in 2H. Given the aggressive launch prices of Reliance JIO’s
mobile services, we now expect higher interest in the auctions vs. our earlier
scenario of the auctions’ missing the government’s budget targets. 2.
Changes to the model portfolio: In view of the recent performance, we
recommend removing: a) Titan (current weight 3% to 0%) as a steep rise in gold
prices (+24% YTD) could negatively impact jewellery demand and in turn revenue
growth expectations, b) Cholamandalam Finance (2% to 0%) due to margin risks
in home equity (c.30% exposure), c) Techno Electric (0.5% to 0%) due to
suppressed RoEs on delays in wind asset sales, and d) Ashoka Buildcon (0.5% to
0%) as revenues in the construction business has not picked up as expected. We
recommend adding to cash (3.3% to 9.3%). 3.
Suhas Harinarayanan
suhas.hari@jmfl.com
Tel: (+91 22) 66303037
Varsha Bhansali
varsha.bhansali@jmfl.com
Tel: (+91 22) 6630 3372
Arshad Perwez
arshad.perwez@jmfl.com
Tel: (+91 22) 66303080
Exhibit 1: India vs. Others
Source: Bloomberg, JM Financial
Exhibit 2: Sensex forward P/E
Source: Factset, JM Financial
Exhibit 3: JMF model portfolio return*
Source: Bloomberg, JM Financial,*since inception
6.5
3.3 3.0 2.9 2.9 2.2 1.9 1.7 1.2 0.9 0.8
0.1 0.1
(0.2)
(4)
0
4
8
CN ID RU EM DE BR JP IN TR SK UK US DM ZA
MoM (%)
17.7
6
8
10
12
14
16
18
20
22
24
Mar-05 Jan-09 Nov-12 Aug-16
(x)
12.3% premium to historical average of 15.8
(20)
(15)
(10)
(5)
0
5
10
15
20
25
5-Jan 1-Apr 26-Jun 20-Sep 15-Dec 10-Mar 4-Jun 29-Aug
Excess Portfolio Nifty(%)(%)
Strategy Monthly
6 September 2016
India | Strategy
JM Financial Research is also available
on: Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ and FactSet.
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers and Research Analyst
Certification.
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 2
Event calendar
Exhibit 4. Event calendar
Source: JM Financial, Bloomberg
Calendar 2016
May Jun July Aug
• Q4FY16 Earnings season • MSP hikes (Kharif)
• RBI Monetary Policy
• OPEC Meeting
• ECB Monetary Policy meeting
• FOMC meeting
• Q1FY17 Earnings
• Monsoon Session of Parliament
(Jul-Sep)
• ECB Monetary Policy meeting
• FOMC meeting
• RBI Monetary Policy
• Q1FY17 Earnings
Sep Oct Nov Dec
• Raghuram Rajan’s term
ends
• Monsoon retreats
• 1st advance Kharif
estimates
• RBI Monetary Policy
• FCNR deposits mature
• FOMC meeting
• ECB Monetary Policy
meeting
• Buildup to UP elections
• Festive Season Dispatches
• Q2FY17 Earnings
• ECB Monetary Policy meeting
• Italy Referendum
• MSP hikes (Rabi)
• Winter Session of Parliament
(Nov-Dec)
• FOMC Meeting
• US Elections
• RBI Monetary Policy
• FOMC Meeting
• ECB Monetary Policy meeting
Jan’17 Feb’17 Mar’17 Apr’17
• Q3FY17 Earnings
• ECB Monetary Policy
meeting
• Railway budget
• Union Budget
• RBI Monetary Policy
• FOMC Meeting
• FOMC meeting
• Dutch elections
• Q4FY17 Earnings
• 1st round of French Presidential
election
• RBI Monetary Policy
• 1st
IMD monsoon forecast
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 3
JMF model portfolio update
Exhibit 5. Changes to the model portfolio
Action Rationale
Remove
Titan (3% to
0%)
We recommend removing Titan (current weight: 3% to 0%) as the recent quick, steep rise in gold prices (+24% YTD) could negatively impact
jewellery demand and in turn revenue growth expectations for Titan. Overall consumer demand also remains subdued. Titan’s share price is
+17–18% over the past 3 months and valuations are also quite expensive now at 41x one-year forward earnings (19% premium to the five-year
average).
Remove
Cholamandal
am Finance
(2% to 0%)
We recommend removing Cholamandalam Finance (current weight:2% to 0%), though it is ahead of the curve when it comes to NPL
transitioning and has strong geographically diversified loan book, as it has 30% exposure in home equity, which is witnessing some pricing
pressure that could compress the company’s margin, going ahead. Thereby, exerting some pressure on profitability, in our view. Also, the
stock has outperformed the Bankex by 76% in the last one year and is currently trading at 3.6x FY18 book.
Remove
Techno
Electric (0.5%
to 0%)
We recommend removing Techno Electric (current weight: 0.5% to 0%) even as the strong order book, 2.6x TTM sales, is likely to translate into
19%/25% sales/PAT CAGR over FY16–18E, as: a) RoEs are at suppressed levels of 12–13% due to delays in sale of wind assets (RoEs of 5% on
low offtake of wind power and elongated NWC cycle), b) sharp outperformance in the past one year (+45% vs. +4% for NIFTY), and c) current
valuations of 18x FY18E earnings offer limited upsides.
Remove
Ashoka
Buildcon
(0.5% to 0%)
We recommend removing Ashoka Buildcon (current weight: 0.5% to 0%) as the revenue momentum for the construction business has failed to
pick up with most EPC projects won in the past 15 months or so taking much longer than expected in ramp up. Furthermore, the adverse
media reports over the company’s alleged irregularities may create an overhang, thereby implying that re-rating may take much longer than
expected with risk continuing to linger till then. The stock currently trades at 15.4x FY18E earnings.
Source: JM Financial
Exhibit 6. JMF model portfolio vs. Nifty (Excl. execution costs)
Since inception, model portfolio has outperformed the Nifty by 14.5% YTD also, model portfolio has beaten markets
Source: Bloomberg, JM Financial, as on 30th August 2016, inception on 05Jan’15
(20)
(15)
(10)
(5)
0
5
10
15
20
25
5-Jan 1-Apr 26-Jun 20-Sep 15-Dec 10-Mar 4-Jun 29-Aug
Excess Portfolio Nifty(%)(%)
(16)
(12)
(8)
(4)
0
4
8
12
16
20
1-Jan 31-Jan 1-Mar 31-Mar 30-Apr 30-May 29-Jun 29-Jul 28-Aug
Excess Portfolio Nifty(%)(%)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 4
Exhibit 7. JM financial model portfolio
Sector/stock Nifty wt (%) Portfolio wt
(%) Stance
Mkt cap
(`bn)
CMP
(`/sh.) Perf (%) 1-yr (%)
Consumer Discretionary 10.2 9.5 MW
Hero Motocorp 1.3 3.0 707 3,541 37 48
Bajaj Auto 1.2 2.5 862 2,979 23 33
Aditya Birla Fashion Retail 2.0 120 156 11 (19)
Indocount Industries 1.0 32 818 (23) (18)
Suprajit Engineering 0.5 26 195 54 38
Somany Ceramics 0.5 25 590 64 71
Consumer Staples 8.8 5.0 UW
Bajaj Corp
1.0
59 400 3 (21)
Hindustan Unilever 2.1 4.0
1,985 917 1 7
Energy 7.5 5.7 UW
Reliance Industries 5.3 5.7
3,437 1,060 14 24
Financials 30.8 31.5 MW
HDFC Bank 7.9 8.0
3,269 1,291 35 26
Axis Bank 2.9 4.0
1,425 597 15 18
IndusInd Bank 1.8 5.0
707 1,186 45 38
Bajaj Finance
3.0
593 11,011 221 119
Bajaj Finserv 3.5 472 2,967 136 64
HDFC Ltd 6.9 6.0
2,222 1,405 22 18
Mahindra Finance 2.0 203 356 29 41
Healthcare 6.8 10.0 OW
Cipla 0.8 3.5 460 573 (9) (16)
Torrent Pharma 3.0 276 1,632 17 3
Sun Pharma 2.8 1.0
1,867 776 6 (14)
Alembic Pharma
1.5
118 629 16 (12)
IPCA 1.0 68 541 (26) (32)
Industrials 6.7 3.0 UW
Bharat Forge
1.0
198 850 12 (27)
Cummins India 1.0 255 920 19 (16)
V Guard
1.0
57 190 68 112
Information Technology 14.6 17.0 OW
Tech Mahindra 1.0 4.0 455 469 (27) (8)
Infosys 6.8 8.0 2,379 1,036 4 (5)
TCS 4.4 4.0
4,948 2,511 0 (2)
NIIT
1.0
15 93 (2) 29
Materials 6.3 3.0 UW
JK Lakshmi
2.0
53 452 13 28
SRF Ltd 1.0 99 1,722 45 46
Telecom 3.4 3.0 MW
Bharti Airtel 1.5 3.0
1,326 332 (2) (6)
Utilities 4.8 3.0 UW
NTPC 1.2 3.0 1,313 159 20 31
Cash 9.3
Source: Bloomberg, JM Financial, as on 01Aug’16
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 5
Q1FY17 Earnings ahead of toned down estimates
Nifty PAT grows by 9% in 1Q: 1Q17 Nifty revenues grew at 4.3%, while PAT
grew 9% YoY (ex- Financials: 14%) led by growth in Materials (Cement),
Industrials (Eicher, improving T&D), Health-care and Energy. Telecom sector
reported weak numbers with 18% YoY decline, while Financials de-grew by 2%
YoY during the quarter.
Higher beats than misses: During 1Q17, the beats/misses ratio improved to
110% from 74% in the past 4 quarters. The number of companies that beat
expectations was higher in the cement, media, metals, agri, pharma, NBFC
and utilities sectors, while misses were higher than beats in consumer, IT,
mid-caps, private and SOE banks.
Revenue growth still to pick up meaningfully: After three quarters of
revenue decline over 1Q16–3Q16, 1QFY17 saw revenue growth (1.0%), but
still lower than the previous quarter growth of 3.7% YoY. Revenues continued
to indicate a declining trend in metals and oil & gas, while industrials
reported revenue growth against the fall during the past four quarters. The
revenue growth trajectory was ahead for building materials, media, utilities
and IT, while it slowed down for the auto, cement, consumer, and pharma
segments.
Exhibit 8. Q1FY17 earnings so far
Sector No.
Sales growth (%) EBITDA growth (%) PAT growth (%) Change in margin (bps)
Expected Actual Expected Actual Expected Actual EBITDA PAT
Auto + 14 11.1 10.9 6.5 11.1 2 12 2 4
Building mat. 6 11.2 8.9 21.4 19.8 27 32 143 135
Cement 11 9.4 7.8 51.5 46.6 82 89 595 507
Consumer 13 4.7 4.7 14.1 12.1 16 13 138 104
Industrials 8 (4.0) 6.4 8.6 53.2 8 17 456 75
Infra 1 9.9 9.1 34.7 16.1 47 45 52 69
IT 11 21.9 21.2 11.7 11.6 8 9 (205) (204)
Media 2 14.5 14.8 22.0 31.9 16 28 444 243
Metals 4 (11.4) (7.6) (3.4) 12.6 (9) (7) 476 6
Midcaps 6 12.0 7.0 13.1 8.3 24 20 17 94
Realty 4 72.0 34.5 6.2 21.7 (17) 24 (194) (73)
Oil & gas 6 (15.9) (14.5) (13.3) 22.3 (21) 26 421 291
Pharma 9 14.0 7.1 12.9 2.9 35 25 (106) 247
NBFC 11 (18.5) 15.1 2.0 23.0 1 23 455 238
Pvt. banks 7 17.4 14.8 15.6 17.9 6 3 229 (471)
SOE banks 5 (8.2) (1.0) (6.8) 13.8 (27) (44) 1,030 (1,077)
Telecom 3 7.9 8.2 11.1 12.9 (38) (15) 158 (177)
Utilities 3 30.7 17.8 33.7 38.4 0 24 633.7 93.4
Financials 23 (2.3) 7.8 3.4 17.3 (6) (8) 642.8 (484.0)
Total 124 0.3 1.0 6.5 17.6 (1.4) 10.8 351.1 110.5
Ex-Oil 115 10.0 10.2 10.6 16.6 4 7 163.3 (41.7)
Ex-Fin 101 0.5 0.4 7.8 17.7 0 17 286.8 153.6
Ex-Fin Ex-Oil 95 11.9 10.6 14.5 16.2 8 14 108.4 32.7
Source: JM Financial
Steady profitability growth: Despite tepid revenue growth, EBITDA margins
continued to expand and were up 310bps YoY, with significant increases
across BM, cement, industrials, media, metals, oil & gas and private
financials, while it declined for IT, pharma and real estate.
Earnings growth recovery in 1QFY17: 1Q17 earnings (PAT) grew at 10.8%
YoY (ex. financials at 17%) and recovered from a 9% decline in 4Q16
(suffered due to high credit costs for financials). Earnings growth was strong
in cement, BM, industrials, media, oil & gas and pharma. PAT, however,
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 6
declined for metals (-7%, but the drop was lower than the decline of 39% in
4Q16), telecom (-15%) and financials (-8% due to a 44% YoY decline by SOE
banks. During 4Q16, financials as a whole declined -68% YoY, which reduced
overall to 2% this quarter. TTMT reported a 62% YoY PAT decline on reported
basis during 1Q17, and adjusted for forex related changes was up by 9%
YoY. The 1Q17 PAT, including TTMT results on reported basis, would be a
growth of 6.9%, against 10.8% now.
Exhibit 9. Improvement in beats/misses ratio to 110% in 1QFY17 vs. 76% over the past 4 quarters
Media, metals, pharma, NBFC and utilities had higher beats,
while IT, consumer, mid-caps and banks had higher misses
Strong earnings recovery during the quarter
Source: JM Financial, Company
Exhibit 10. Revenue growth in line with expectations
Revenue growth was largely in line with expectations Ex. energy (oil & gas), revenues grew 10.2% YoY in 1Q17
Source: JM Financial, Company
82
6677
85
110
0
20
40
60
80
100
120
1QFY16 2QFY16 3QFY16 4QFY16 1QFY17
Beats/Misses (%)(%)
-3.1
(7.0)-5.5
3.7
1.03.1 3.2
1.1
-8.9
10.8
(10)
(5)
0
5
10
15
1QFY16 2QFY16 3QFY16 4QFY16 1QFY17
Revenue growth (%) PAT growth (%)(%)
0.3
10.0
0.5
11.9
1.0
10.2
0.4
10.6
0
2
4
6
8
10
12
14
Total Ex-Oil Ex-Fin Ex-Fin Ex-Oil
Revenue growth Expected Revenue growth Actual(%)
21.2
17.8
14.8
10.9
8.9
8.2
7.8
7.8
7.1
6.4
4.7
1.0
(7.6)
(14.5)
(20.0) (10.0) - 10.0 20.0 30.0
IT
Utilities
Media
Auto & Ancs
Building Materials
Telecom
Financials
Cement
Pharma
Industrials
Consumer
JMF Coverage
Metals
Energy
Revenue Growth
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 7
Exhibit 11. Margin expansion continued in 1Q17
Overall EBITDA grew across sectors led by industrials, cement
and utilities
Cement, building materials, media, energy, pharma and utilities
saw healthy PAT growth
Source: JM Financial, Company
Exhibit 12. Consumers: Volume growth in selected pockets
Volume growth remains tepid for consumer staples
Paints as a segment remains strong in volume growth
Source: JM Financial
Exhibit 13. Auto sector: Rural volumes remain weak, urban growth supportive
Tractor sales growth improved in 1Q17 Mixed performance across BM and Consumer Electricals
Source: JM Financial
53.2
46.6
38.4
31.9
22.3
19.8
17.6
17.3
12.9
12.6
12.1
11.6
11.1
- 10.0 20.0 30.0 40.0 50.0 60.0
Industrials
Cement
Utilities
Media
Energy
Building…
JMF Coverage
Financials
Telecom
Metals
Consumer
IT
Auto & Ancs
EBITDA Growth
89.0
31.9
27.7
25.5
25.4
23.8
16.6
13.1
11.6
10.8
9.2
(7.1)
(7.5)
(14.6)
(20.0) - 20.0 40.0 60.0 80.0 100.0
Cement
Building Materials
Media
Energy
Pharma
Utilities
Industrials
Consumer
Auto & Ancs
JMF Coverage
IT
Metals
Financials
Telecom
PAT Growth
(5)
0
5
10
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
16
2QFY
16
3QFY
16
4QFY
16
1QFY
17
Dabur HUL Colgate(%Yo
0
5
10
15
201Q
FY1
5
2QFY
15
3QFY
15
4QFY
15
1QFY
16
2QFY
16
3QFY
16
4QFY
16
1QFY
17
Asian Berger(%YoY)
(30)
(20)
(10)
0
10
20
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
16
2QFY
16
3QFY
16
4QFY
16
1QFY
17
Tractor 4W 2W(%YoY)
(10)
(5)
0
5
10
15
20
25
30
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
16
2QFY
16
3QFY
16
4QFY
16
1QFY
17Somany Kajaria Havells V-Guard
(%YoY)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 8
Exhibit 14. Sector commentary on 1Q17 results
Sector Beat/In-line/Miss Overall Sector Commentary
Auto + Auto OEMs: Operationally in-line
Auto Ancs: Mixed bag
PV (MSIL): Weak volumes with higher realisation leading to operationally in-line
performance.
2-wheelers: Executive segment volumes are yet to pick up meaningfully, although
premium motorcycles are growing at a healthy pace. Scooters continue to register
healthy growth, driven by urban markets. Following the monsoon, 2HFY17 is likely to
see better volumes. Healthy operational performance (ex. TVS).
CV: MHCV seeing moderation in growth. LCV volumes showing signs of pick up. Ex.
TTMT, healthy operational performance.
Auto Ancs: Tyre companies are not yet impacted by the rise in natural rubber prices.
NR price rise would impact from Q2. Other auto-ancillaries were a mixed bag.
Agri. inputs In-line
Normal monsoons have paved way for improvement in acreages (rice up 3%, pulses up
35%) and demand has picked up at dealer levels. Q2 is expected to lead to better pick
up in the domestic business. International agronomy continues to remain muted. PI's
domestic biz grew in line with the industry at 10% YoY. CSM exports grew 20% YoY on
higher order book execution and benefits on scale up at SEZ.
PI Industries’ sales growth (+17% YoY) is in line with expectations. Margin expansion of
154bps on better product mix.
Aviation In-line
In line with expectations, the quarterly earnings remain muted given the drop in
average ticket prices. Gain in crude correction was frittered away by the mismatch in
load factors and yields.
Building
materials
Ceramics/Sanitary: In-line
Plywood: Beat
Strong volume growth. Lower RM costs resulted in gross margin improvements. Lower
power and fuel costs also improved EBITDA margins. Accordingly, companies reported
strong YoY PAT growth.
Cement In-line
On expected lines, the cement sector reported a strong set of numbers. Particularly,
North-based players, which saw a sharp jump in realisation led by strong pricing
improvement in northern markets. The sector performance was further aided by lower
P&F cost as most companies used low cost pet-coke inventories from previous quarters.
Chemicals
SRF reported better-than-
estimated results based on lower
RM costs
Chemical companies are likely to continue to benefit from the China crackdown (recent
news reports indicate China proposing draft rules to impose pollution cess). While it is
difficult to quantify the impact, chemical companies likely in structural growth phase.
Consumer HPC: Miss
Paints: Beat
HPC’s revenue growth remained tepid on subdued volumes. Benign RM costs and softer
A&P spend aided earnings growth. Paints posted a strong performance on resilient
volume growth and continued GPM expansion.
Industrials
(Power
Equipment)
In-line
BTG demand remains subdued, given high capacity addition with low demand growth—
negative for BHEL. T&D capex cycle is yet to pick up from SEB end driven by UDAY,
while PGCIL capex is tapering, restricting near-term growth for the likes of ABB, Alstom
T&D and more. T&D’s EPC contractors are seeing good traction from low-end rural
electrification and distribution capex being down by SEBs.
Industrials Beat
Industrials results were a mixed bag, as long gestation capex segments such as captive
power and mining (exports) were weak, while T&D and consumer durable (room ACs)
players reported a sharp growth in profitability, leading to a marginal beat on an overall
basis.
Infra Miss
The execution pick up in the domestic market is still elusive right from L&T to smaller
road EPC players. L&T numbers were further impacted by changed reporting norms as
per IndAS, which necessitated various non-cash provisioning.
IT Beat
USD revenue growth was weaker for most companies, despite seasonal strength largely
because of demand transition underway as discretionary spend is shifting to digital.
This is leading to cannibalisation of traditional services. Margin performance was better
than expectations on more calibrated wage revisions. Management commentary was
generally cautious on the near-term outlook due to Brexit-led demand uncertainties
especially in the UK/BFSI sector.
Media EBITDA beat from broadcasters
ZEEL reported a revenue-miss, but an EBITDA-beat on lower content cost, sports-profits
and income from the super-hit movie Sairat.
Sun reported a revenue beat and a strong EBITDA beat due to higher ad and pay TV
revenues, and lower IPL Cricket losses as well as lower programming and movie
amortisation costs.
Metals Beat
Steel companies reported higher-than-expected EBITDA, given the sharp run up in steel
prices with the imposition of MIP. Lower imports aided volume growth, which were
higher than expected.
Source: JM Financial
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 9
Exhibit 15. Sector commentary on 1Q17 results (continued)
Sector Beat/In-line/Miss Overall Sector Commentary
Real estate In-line
Sales continue to remain muted with limited realisation change across projects; limited
addition to supply in 1QFY17 as developers await better visibility on demand;
commercial and retail real estate are doing well with low vacancy and rentals increasing
5–10% YoY. Improvement in demand and implementation of RERA remains the key for
the sector.
Oil & gas
All OMCs and RIL report
inventory gains between $2 and
$4; thus, net profits are higher
than estimated; gas companies
yet to report results
Broadly, results and net of inventory gains are in line. With GRMs likely to decline in 2Q
and no inventory gains, 2Q earnings are likely to be lower and therefore, 1QFY17 could
be near peak earnings.
Pharma In-line
Results were directionally in line with expectations; the US continued to face pricing
pressures in the base business and domestic business grew in single digits impacted by
price cuts, FDC bans and NLEM expansion. Dr.Reddy's and to a lesser extent Sun
Pharma underperformed due to product concentration risk and lower base biz/gGleevec
contribution, respectively. We do not expect a material change in the operating
environment in the next quarter, as companies with a high US base and acute therapy
focused companies are likely to face pressure.
NBFC
PAT beat from Bajaj Finance;
miss on SHTF, CIFC due to
margin pressure; miss on MMFS,
LICHF due to higher provisions
Bajaj Finance reported a stupendous quarter, while HFCs’ performance was in line,
except for LICHF, which witnessed a one-time provisioning hit in the developer book.
It was a cyclically weaker quarter for MMFS; SHTF witnessed some margin pressure due
to the shift towards newer vehicles, while CIFC witnessed some margin pressure in the
home equity book.
Pvt. banks In line
HDFC and IIB continue to witness strong retail growth; Axis continued with the clean-up
process on expected lines, while corporate pressures intensified for ICICI Bank; KMB's
performance was impacted by lower credit and fee growth.
SOE banks In-line
1Q17 witnessed lower corporate growth for most PSBs, while retail growth continued to
be strong. SBI reported strong top-line growth of 15% led by margin expansion and
higher treasury gains. The merger process with associates is progressing on-track and
slippages were in line with no negative surprises; BOB witnessed improved operating
metrics with adj. NIM expansion. However, asset quality stress sustained. PNB reported
higher recoveries, but asset quality stress persisted and impacted the top-line with
interest reversals.
Telecom EBITDA beat from Bharti Airtel;
Idea missed; Bharti Infratel In-line
1Q saw a pickup in mobile voice realisations, while the slowdown in data revenue
growth continued. The key differences between Airtel and Idea's performance were: (a)
voice minutes growth; and (b) the EBITDA margin trend—Bharti FY17 EBITDA forecast
remains largely unchanged despite a material 1Q beat, because of impending currency
impact in Nigeria, and the sale of two op-cos in Africa. Bharti Infratel results are yet to
fully reflect: (a) the impact of tenancy exits in 1Q; and (b) the rental-freeze per MSA
amendments.
Utilities In-line
1Q has seen better PLFs across plants due to summer power demand leading to better
earnings. However, commentary on power demand revival in the long term depends on
industrial demand. Merchant prices, however, continued to decline, indicating power
surplus scenarios continue in the medium term. Regulated utilities remain a safer
haven, while plans with open capacities will see impact.
Source: JM Financial
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 10
YTD fiscal deficit at c.74% of budget target
Apr–Jul’16 fiscal deficit reaches c.74% of FY17BE levels: YTD fiscal deficit
stands at `3.94tn (2.6% GDP/73.7% FY17BE) vs. `3.85tn (2.8% GDP/69.3%
FY16BE) in FY16 on healthy growth in revenue receipts (22% YoY) vs. nominal
total expenditure (9.3% YoY). The revenue generation is boosted by the healthy
net tax revenue (44% YoY), while non-tax revenue actually declined (-38.2% YoY).
The government seems to be taking a cautious approach as far as spending goes
with capital expenditure declining 17.1% YoY that we expect to correct in 2H.
Expenditure has primarily been directed towards revenue expenditure (89%
share; 13.7% YoY) with focus on planned expenditure (36% YoY) vs. non-planned
expenditure (4% YoY).
Net tax revenues grow at healthy rate: Healthy growth in the centre’s net tax
revenues (44.1% YoY; 21% FY17BE) ensured sound revenue receipts YTD’17, even
as non-tax revenues declined 38.2% YoY. Indirect taxes, which contribute c.58%
of the total tax revenues, grew at 29.3% YoY (vs. 35.4% YoY last year) on strong
excise duty collections (55.6% YoY) and service taxes (26.1% YoY).
Rise in petroleum, renewable energy and agricultural spending: Among key
ministries and departments, on an FYTD level, a sharp hike (base effect) is
evident in spending on skill development, housing and poverty alleviation
measures, heavy industries, and new renewable energy. Other sectors that
attracted major spending are coal (137% FYTD), power (40%), public distribution
system (42%) and agri. (39%), while ministries such as labour & employment (-
64%), railways (-59%) and roads (-51%) witnessed a significant spending decrease.
Exhibit 16. Fiscal deficit at a glance
(` bn) FY17BE % YoY Apr–Jul'16 Share of BE % YoY Apr–Jul'15
Central govt. net tax revenue 10,541 11.2 2,217 21.0 44.1 1,539
Non-tax revenue 3,229 24.9 341 10.6 (38.2) 551
Central govt. revenue receipts 13,770 14.2 2,558 18.6 22.4 2,090
Non-debt capital receipts 671 51.8 74 11.1 7.8 69
Total receipts 14,442 15.5 2,632 18.2 21.9 2,159
Non-planned expenditure 14,281 9.2 4,589 32.1 3.6 4,431
Of which capital expenditure 1,006 5.4 298 29.6 (13.3) 344
Of which revenue expenditure 13,274 9.5 4,291 32.3 5.0 4,087
Planned expenditure 5,500 15.3 1,978 36.0 25.3 1,578
Of which capital expenditure 1,464 2.9 415 28.3 (19.7) 516
Of which revenue expenditure 4,036 20.5 1,563 38.7 47.2 1,062
Total expenditure 19,781 10.8 6,567 33.2 9.3 6,010
Fiscal deficit -5,339 (0.2) -3,935 73.7 2.2 -3,851
Fiscal deficit/GDP (%) 3.5
2.6
2.8
Source: CGA, JM Financial
Exhibit 17. Even as planned exp. grows at healthy pace, total expenditure has grown only nominally
Cumulative direct and indirect tax growth Cumulative planned and non-planned expenditure growth
Source: CGA, JM Financial
(20)
0
20
40
60
80
Sep-
13
Dec-
13
Mar
-14
Jul-1
4
Oct-1
4
Feb-
15
May
-15
Aug-
15
Dec-
15
Mar
-16
Jul-1
6
Direct tax Indirect tax(%YoY Cumulative FYTD)
(20)
(10)
0
10
20
30
40
50
60
Sep-
13
Dec
-13
Mar
-14
Jul-1
4
Oct
-14
Feb-
15
May
-15
Aug
-15
Dec
-15
Mar
-16
Jul-1
6
plan expenditure non-plan expenditure(%YoY Cumulative FYTD)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 11
Exhibit 18. Energy sector spending (renewables, coal and power) grows sharply on low base
Cumulative revenue and capital expenditure growth Cumulative expenditure growth for key ministries
Source: CGA, JM Financial
(40)
(20)
0
20
40
60
80
100
120
Se
p-1
3
De
c-1
3
Ma
r-1
4
Jul-
14
Oct-
14
Fe
b-1
5
Ma
y-1
5
Au
g-1
5
De
c-1
5
Ma
r-1
6
Jul-
16
Capital Expenditure Revenue Expenditure(%YoY Cumulative FYTD)
(70) (20) 30 80 130 180
RenewablesCoal
PowerPDSAgri
Urban DevDrinking Water
Rural Dev.MSME
SteelAviation
PetroleumRoad
ShippingRailways
Labour(%Growth YTD)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 12
Equity market performance
Emerging markets continue to remain more attractive
Exhibit 19. Financials and energy outperform, while telecom and utilities underperform
US EU GB DE JP AU ES CN BR IN RU ZA MX ID MY
Index 0.1 0.8 1.3 3.0 (0.0) (1.4) 1.2 8.1 0.9 1.0 3.0 (0.2) 1.7 2.7 1.6
Consumer Discretionary (1.2) 1.1 3.6 1.4 2.2 (0.9) 3.0 7.1 (3.8) 4.0 - 7.6 4.0 1.9 (1.1)
Consumer Staples (0.8) (0.5) 0.4 2.9 (4.9) 2.8 (1.3) 7.3 (0.0) (0.5) 5.3 (1.8) (0.2) 1.2 3.1
Energy 2.1 0.1 (0.5)
0.3 2.8 7.2 0.7 6.8 5.1 3.2 1.9 - 15.3 5.6
Financials 3.3 4.4 6.9 3.6 1.2 (2.3) 3.8 10.0 2.6 3.6 5.0 (3.5) 0.7 4.7 1.5
Healthcare (3.1) (4.4) (1.8) (0.1) (7.6) (3.0) (2.3) 8.6 1.5 (1.4) - (2.1) - 6.3 0.2
Industrials 1.1 3.4 2.2 8.9 (0.9) (7.7) (2.5) 3.1 (0.6) (0.3) - (3.7) 0.9 (1.3) 2.8
Information Technology 2.0 1.0 1.8 1.4 1.5 11.3 (0.1) 11.4 (9.5) (3.1) - - - - -
Materials 0.9 3.5 (2.0) 8.2 6.6 3.9 - 4.0 (0.8) 5.5 2.4 (8.7) 4.3 7.1 2.0
Telecom (5.4) (0.6) (1.7) (0.9) 2.5 (8.9) 2.3 2.1 (2.1) (10.1
) (4.0)
(11.9
) 3.1 (2.5) 0.4
Utilities (6.3) (4.4) (2.6) (11.6
) (5.2) (5.2) (3.6) 6.4 (2.0) 2.8 10.4 - - (5.8) 1.9
Source: Bloomberg, JM Financial - Based on MSCI Indices
Exhibit 20. India outperforms developed markets, underperforms emerging markets
Indian markets remain ahead of developed markets Mid-caps outperform large and small caps
Source: Bloomberg, JM Financial – L-cap: BSE100 index, M-cap: BSE Mid-cap index and S-cap: BSE Small-cap index
Exhibit 21. Metals, bank and energy outperformed Nifty, while telecom and IT were weak
Metals and banks shine while telecom and realty lag behind Markets turn less volatile
Source: Bloomberg, JM Financial
6.5
3.3 3.0 2.9 2.9 2.2 1.9 1.7 1.2 0.9 0.8
0.1 0.1
(0.2)
(4)
0
4
8
CN ID RU EM DE BR JP IN TR SK UK US DM ZA
MoM (%)
4.0
1.9 1.4
0
1
2
3
4
5
M-cap L-cap S-cap
MoM (%)
5.7 4.5 4.5 4.3
1.1 1.1
(0.4) (1.1) (1.7)(3.4) (4.0)
(10.1)(12)
(8)
(4)
0
4
8
Me
tals
Ba
nk
s
En
erg
y
Au
to
FM
CG
Po
we
r
Ph
arm
a
Infra
Ca
p. G
ds.
IT Re
alty
Te
leco
m
NiftyMoM (%)
0
5
10
15
20
25
(40)
10
60
110
160
Sep
-15
Oct-1
5
No
v-15
De
c-15
Jan-1
6
Feb
-16
Mar-1
6
Ap
r-16
May-1
6
Jun
-16
Jul-1
6
Au
g-16
Cash Derivatives INVIX (RHS)(Index) (%)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 13
Valuations – Sensex at 17.7x NTM P/E
Markets continue to trade at a premium
Exhibit 22. Sensex continues to trade at above average valuations
Sensex NTM P/E Sensex NTM P/B
Source: Factset, JM Financial, As of 30th
Aug 2016
Exhibit 23. RoE remains closer to FY09–10 bottom
Sensex NTM RoE Sensex NTM EV/EBITDA
Source: Factset, JM Financial, As of 30th
Aug 2016
Exhibit 24. Premium of PEG to historical averages is substantial
Sensex NTM dividend yield Sensex NTM PEG
Source: Factset, JM Financial, As of 30Aug’16
17.7
6
8
10
12
14
16
18
20
22
24
Mar-05 Jan-09 Nov-12 Aug-16
(x)
12.3% premium to historical average of 15.8
2.8
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Mar-05 Jan-09 Nov-12 Aug-16
(x)
1.8% discount to historical average of 2.8
15.7
14
16
18
20
22
24
Mar-05 Jan-09 Nov-12 Aug-16
(%)
11.9% discount to historical average of 17.8
10.5
6
7
8
9
10
11
12
13
14
Mar-05 Jan-09 Nov-12 Aug-16
(x)
7.3% premium to historical average of 9.8
1.6
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Mar-05 Jan-09 Nov-12 Aug-16
(%)
2% premium to historical average of 1.6
1.07
0.3
0.5
0.8
1.0
1.3
1.5
Mar-05 Jan-09 Nov-12 Aug-16
(x)
22.2% premium to historical average of 0.9
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 14
Exhibit 25. Global valuations
Country
Now Long-term averages Premium/discount
NTM EPS
growth NTM P/E NTM P/B NTM RoE
NTM EPS
growth NTM P/E NTM P/B NTM RoE
NTM EPS
growth NTM P/E NTM P/B NTM RoE
India 15.0 17.7 2.8 15.7 15.7 15.8 2.7 17.4 (4.2) 12.2 1.3 (9.7)
US 9.2 17.1 2.7 15.9 10.9 14.0 2.2 16.0 (15.8) 21.6 20.4 (1.0)
Japan 8.3 16.2 1.4 8.9 24.8 17.8 1.4 7.8 (66.4) (8.8) 3.8 13.9
Brazil 25.3 13.5 1.3 9.5 23.0 9.9 1.4 14.4 10.1 36.9 (9.4) (33.8)
South Africa 19.0 13.8 2.0 14.3 17.2 12.0 2.1 17.9 10.4 15.6 (8.0) (20.4)
Russia 14.4 6.4 0.7 11.5 16.4 22.7 0.6 2.8 (12.2) (71.9) 16.7 314.6
China 24.2 25.7 3.1 12.0 27.2 20.2 2.7 13.6 (11.1) 27.5 12.8 (11.5)
Indonesia 15.9 17.9 2.6 14.7 15.3 13.8 2.6 19.1 4.0 29.5 (0.4) (23.1)
Mexico 22.4 19.3 2.5 12.7 18.4 16.0 2.5 15.5 21.8 20.7 (0.7) (17.7)
Taiwan 5.7 13.9 1.6 11.7 15.5 13.9 1.7 12.2 (63.4) 0.3 (3.9) (4.2)
Thailand 14.7 15.4 1.9 12.3 13.7 11.7 1.7 14.8 7.6 31.1 8.7 (17.1)
Source: Factset, consensus numbers, JM Financial
Exhibit 26. Financial estimates and valuation for key sectors
Revenue growth
(%) EBITDAM (%) PAT growth (%) P/E P/B RoE (%)
FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E
Auto & ancs 13.1 14.7 14.2 14.1 16.6 17.7 19.3 16.4 3.7 3.2 20.7 20.8
Building Material 12.4 14.0 13.4 14.4 41.3 32.5 31.7 23.9 5.3 4.5 17.8 20.3
Cement 15.5 14.7 21.6 22.8 67.2 31.6 27.1 20.6 3.4 3.0 13.4 15.6
Consumer 11.4 13.8 22.0 22.3 12.1 15.5 37.3 32.4 12.2 10.8 34.1 35.4
Industrials 17.1 19.3 7.7 9.3 104.2 39.7 36.8 26.3 2.6 2.4 7.2 9.5
Infra 12.2 14.8 13.9 14.9 17.6 26.9 24.7 19.5 2.7 2.4 11.4 13.0
IT 11.5 10.5 24.8 24.8 9.3 11.3 16.4 14.7 4.0 3.5 26.0 25.4
Media 16.3 15.2 34.9 35.7 19.9 18.0 29.8 25.3 6.4 6.0 22.5 24.4
Metals 9.9 6.1 15.0 15.8 173.8 17.9 14.7 12.4 1.3 1.2 9.3 10.2
Midcaps 16.9 15.5 15.3 15.7 18.7 22.0 20.4 16.7 4.9 4.1 25.8 26.7
Oil & Gas 1.0 5.8 13.5 13.8 14.8 10.6 12.4 11.2 1.4 1.3 11.6 11.9
Pharma 8.6 13.6 25.9 27.7 7.8 26.6 26.0 20.5 4.7 4.0 19.4 21.0
Realty 17.0 10.4 18.0 20.2 27.1 34.2 23.8 17.7 2.3 2.0 9.9 12.1
Telecom 4.9 5.9 37.7 37.8 (11.3) 3.7 27.3 26.4 2.1 2.0 7.6 7.8
Utilities 14.7 12.7 31.0 33.0 2.4 18.8 14.0 11.8 2.4 2.2 17.7 19.5
NBFC* 10.8 11.5 89.5 88.1 11.1 9.1 15.4 14.1 2.6 2.3 18.3 17.4
Pvt. Banks* 15.8 20.5 85.9 85.8 24.2 26.8 20.7 16.3 2.8 2.5 14.7 16.3
PSU Banks* 15.0 17.2 76.0 77.6 111.4 40.2 8.5 6.3 0.8 0.7 10.5 12.6
Total 8.5 10.5 22.9 23.7 22.3 18.6 18.0 15.2 2.6 2.3 15.1 16.1
Source: Company, JM Financial, * NII, PPP and PAT for Financials
Exhibit 27. Sector valuations at a glance
Earnings growth vs. P/E P/B vs. RoE
Source: Bloomberg, Factset, JM Financial
Auto
Building Material
Cement
ConsumerIndustrials
Infra
IT
Media
Metals
Midcaps
Oil&Gas
PharmaRealty
Telecom
UtilitiesNBFC
Pvt. Banks
0
5
10
15
20
25
30
35
40
-5 0 5 10 15 20Earnings Growth (%)
PE
(x)
Auto
Building Material
Cement
IndustrialsInfra
IT
Media
Metals
Midcaps
Oil&Gas
Pharma
Realty
Telecom
UtilitiesNBFCPvt. Banks
0
2
4
6
8
10
12
0 10 20 30 40
PB(x
)
RoE (%)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 15
Flows on a steady path
FIIs bought US$1.5bn from equities, DMF flows improve
Exhibit 28. FIIs even as they are buying, the magnitude remained weak as DMF flows keep up the pace
FII equity remain benign as debt falls to negative DMF equity inflows
Source: Bloomberg, AMFI, JM Financial
In Aug’16 markets saw net inflow of US$1.5bn into equities as FIIs withdrew US$0.4bn from debt. In Jul’16, domestic mutual
funds (DMFs) have garnered funds at a net tally of US$585mn of equity inflows.
Exhibit 29. DMFs attracted equity inflows
(US$ bn) 2012 2013 2014 2015 YTD-2016
FII 31.4 11.3 42.4 10.8 4.8
Equity 24.5 19.8 16.2 3.3 6.1
Debt 6.9 (8.5) 26.3 7.6 (1.3)
DMF equity (3.0) (1.9) 8.8 16.7 4.0
Source: Bloomberg, AMFI, JM Financial, * Jan-Jul for DMF Equity flows
Exhibit 30. RBI continues to maintain sound forex reserves
Source: Bloomberg, JM Financial
-2.6
-0.9
0.8
-1.1
0.0
-1.7-1.2
4.1
0.60.4
0.8
1.7 1.5
-0.1
0.0
2.4
-0.6 -0.6
0.2
-1.2
0.2 0.5
-0.8 -1.0
1.0
-0.4
(3)
(2)
(1)
0
1
2
3
4
5
Aug-15 Nov-15 Feb-16 May-16 Aug-16
FII-Equity FII-Debt(US$bn)
(2,000)
0
2,000
4,000
6,000
Jun
-06
Jan
-07
Jul-
07
Jan
-08
Au
g-0
8
Feb
-09
Au
g-0
9
Mar
-10
Sep
-10
Ap
r-1
1
Oct
-11
Ap
r-1
2
No
v-1
2
May
-13
No
v-1
3
Jun
-14
De
c-1
4
Jun
-15
Jan
-16
Jul-
16
Net Inflows Total Inflows(US$mn)
365
200
220
240
260
280
300
320
340
360
380
Apr-
13
Jul-1
3
Nov
-13
Feb-
14
Jun-
14
Sep-
14
Jan-
15
Apr-
15
Aug-
15
Nov
-15
Mar
-16
Jul-1
6
US $bn
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 16
INR remains a stable currency
Exhibit 31. Rupee has been stable against developed market currencies
MoM change in INR exchange rate INR remained stable against a stable USD
Source: Bloomberg, JM Financial
Exhibit 32. REER and NEER valuation remains stable, INR continues to be overvalued
Volatility in INR remains stable REER and NEER suggestive of an over-valued INR
Source: Bloomberg, JM Financial
Exhibit 33. RBI continues to maintain sound forex reserves
Source: Bloomberg, JM Financial
3.7
1.0
0.3 0.0
(0.2) (0.3) (0.4)(0.8)
(1.5)(2)
0
2
4
ZARINR CHFINR GBPINR USDINR EURINR JPYINR CADINR BRLINR RUBINR
(%MoM)Aug-16
57
59
61
63
65
67
69
71
900
950
1,000
1,050
1,100
1,150
1,200
1,250
1,300
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16
Dollar Index (LHS) USDINR (RHS)
4
5
5
6
6
7
7
8
8
9
9
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16
(%)
60
64
68
72
60
70
80
90
100
110
120
Aug-15 Nov-15 Feb-16 May-16 Aug-16
REER NEER USDINR (RHS)
365
200
220
240
260
280
300
320
340
360
380
Apr-
13
Jul-1
3
Nov
-13
Feb-
14
Jun-
14
Sep-
14
Jan-
15
Apr-
15
Aug-
15
Nov
-15
Mar
-16
Jul-1
6
US $bn
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 17
Commodities witness slowdown
Energy prices on a rise, while precious metals moderate
Exhibit 34. Most commodities stay stable even as crude witnessed surge
Commodity prices moving down Only zinc continued to pick up though slowly
Source: Bloomberg, JM Financial
Exhibit 35. Gold & silver corrected while agri-commodities continue to be a mixed bag
Silver prices corrected more than gold Prices of cotton and wheat fell c.10–11% MoM
Source: Bloomberg, JM Financial
Exhibit 36. Energy prices picked up momentum; Baltic Dry Index too moves upwards
Brent increased 14+% MoM, gas became cheaper Baltic Dry Index moves upwards
Source: Bloomberg, JM Financial
65
70
75
80
85
90
95
100
105
110
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16
BCOM Index CRB CMDT Index CRY Index
65
75
85
95
105
115
125
135
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16
Copper Zinc Aluminium
70
80
90
100
110
120
130
140
150
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16
Gold Silver
50
70
90
110
130
150
170
190
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16
Sugar Wheat Cotton Coffee Tea Copra Palm Oil
40
50
60
70
80
90
100
110
120
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16
Brent Gas
40
140
240
340
440
540
640
740
840
940
1,040
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16
BDIY Index
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 18
Exhibit 37. Performance on select commodities
(% YoY) 2006 2007 2008 2009 2010 2012 2013 2014 2015 Last
month
Current
month
Commodity Indices
CRY Index -7.4 16.7 -36.0 23.5 17.4 -3.4 -5.0 -17.9 -23.4 -6.0 1.0
Bcom Index -2.7 11.1 -36.6 18.7 16.7 -1.1 -9.6 -17.0 -24.7 -5.1 -1.1
CRB Index 19.6 14.1 -23.8 33.7 23.6 0.4 -5.7 -4.1 -14.4 -1.1 -0.9
Energy
Brent 5.5 56.1 -58.4 96.9 20.1 2.8 0.9 -48.6 -36.3 -13.1 14.5
Gas
-0.4 -19.8 -9.3 -6.6 -15.7 -26.3 -1.1 -2.9
Coking Coal
4.1 10.6
Thermal Coal
4.1 4.5
Precious Metals
Gold 23.2 30.9 5.8 24.4 29.6 7.1 -28.3 -1.4 -10.4 2.2 -2.7
Silver 46.4 14.6 -22.9 48.0 83.2 9.0 -35.8 -19.3 -11.9 8.7 -7.9
Base Metals
Copper 44.0 5.5 -54.0 140.2 30.2 4.4 -7.2 -14.4 -25.3 1.7 -6.5
Aluminium 23.1 -14.1 -36.1 44.8 10.8 2.6 -13.2 2.9 -18.7 -0.3 -0.9
Zinc 121.6 -44.0 -49.0 111.9 -4.1 12.7 -1.2 6.0 -26.1 6.6 3.0
Agri-Produce
Cotton
-1.6 15.4 -11.2
Sugar
-11.8 -11.7 -6.3 6.8
Corn
-9.5 -12.3 -7.7 -7.9
Wheat 3.3 - - - - - - 59.2 -18.0 -6.4 -10.0
Coffee 17.8 7.9 -17.7 21.3 76.9 -36.6 -23.0 50.5 -23.9 1.5 -1.0
Palm Oil 41.4 55.4 -45.1 53.0 47.9 -26.9 13.3 -12.8 4.7 -1.1 17.5
Milk 1.6 52.2 -26.1 -6.1 -7.0 7.8 2.1 -16.2 -14.8 0.1 9.3
TiO2
-11.3 18.8 -17.9 10.9 -11.0 -6.6 - -
PFAD
69.8 -54.1 103.0 52.7 -27.0 20.2 -18.6 -24.2 -1.7 10.3
Copra 18.8 -3.8 17.8 -13.9 72.5 -11.0 54.3 23.2 -30.2 1.3 19.1
Tea 9.0 34.1 -11.9 79.5 -28.8 51.2 -11.4 -37.0 51.0 -8.4 9.8
Source: Bloomberg, JM Financial
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 19
Lead industrial indicators await trigger
Eight core industries slow down to 3.1% YoY in Jul’16: Growth in eight core
industries has slowed down in Jul’16 to 3.1% YoY vs. 5.3% YoY in Jun’16. In
Q1FY17, the index grew 5.4% YoY (though stagnated on QoQ basis at -0.1%).
The Jul’16 progress can be primarily attributed to the improved refinery
sector (weight: 5.9%, 13.7% YoY), while other sectors grew at almost less than
5% levels with the steel sector turning negative. Typically power demand
tends to be weak during Q2 due to the onset of monsoons; we observe power
generation has nearly stagnated in Jul’16 (1.6% YoY) as effects of one-off
events subside.
IIP moving only slowly: Even as core sectors, which account for c.38% of IIP,
witnessed 5.4% YoY (5.3% YoY) increase in Q1FY17 (Jun’16), the broader
index remained static at 0.6% YoY (2.1%). While Q1FY17 has been weaker than
Q4FY16 (-5.1% QoQ), the YTD performance (0.4% CYTD) also shows no
significant signs of pick up. Weak manufacturing (weight: 76%; 0.9% YoY) and
capital goods (9%;-16.5% YoY) continue to drag the overall index.
Foreign trade continues to remain weak as exports decline 7% in Jul’16:
After turning positive in Jun’16, exports declined 7% to $22bn in Jul’16, as
exports of engineering goods (share: 23%) and POL products (12%) declined
by 12% and 22% YoY, respectively. However, lower commodity prices,
including crude oil prices, have meant that the trade balance position
continues to improve as the value of imports fell 19% YoY in Jul’16.
Interestingly, both growth in exports and imports turned positive in Q1FY17
to 1.8% and 1.5% QoQ, respectively.
Surplus from services trade contracted 6% YoY: Although, India runs a
surplus in services trade, its magnitude has either remained nearly stagnant
or contracted in the past eight months. In Jul’16, surplus fell 6% to $4.9bn as
growth in payments (12%) outpaces receipts (4.4%). 38.
Commercial vehicles (CV) segment moderates, passenger vehicles (PV)
segment witnesses healthy growth in Jul’16: While sales of new CVs grew
13% YoY in Q1FY17, the pace seemed to stagnate in Jul’16 due to weak
M&HCVs segment, declined 7.6% YoY (vs. 30% growth in FY16), and nominal
growth in LCVs at 6.3% YoY. However, on YTD basis, CV volumes continue to
post healthy growth of 14%+ as both M&HCVs and LCVs witness double-digit
growth of 19% and 11%, respectively.39.
PV segment picks up pace in Jul’16, 2-wheelers (2W) outshine: Even as the
passenger vehicle segment witnessed strong growth of 17% in Jul’16 and 6.7%
YoY in Q1FY17, it was unable to keep Q4FY16 momentum and declined 3.6%
QoQ. The 2W segment, on the other hand, outperformed other market
segments with a healthy increase in sales in Q1FY17 (14.3% YoY, 8.4% QoQ),
Jul’16 (13.5% YoY) and YTD (11.8% YoY). 40.
Going ahead, the payouts under the 7th
Pay Commission may provide an
impetus to PV volumes, even as improvement in the rural economy and sound
macro trends are crucial for full-fledged demand recovery in FY17. 41.
Cement production grew at 5.7% YoY in Q1FY17: While cement volumes
grew a strong 10%+ in Jun’16, Q1 growth came in at moderate levels of 5.7%
(vs. 11.4% YoY in the last quarter). However, growth slowed down to 1.4% YoY
in Jul’16. In YTD, cement demand has grown 8.5% with much of the boost
attributable to higher public spending on infrastructure and irrigation
development. 42.
Exhibit 38: Core sector growth slows
down
Source: MoSPI, JM Financial
Exhibit 39: IIP growth trend
Source: MoSPI, JM Financial
Exhibit 40: Trade deficit narrows
Source: CMIE, JM Financial
Exhibit 41: CV Volumes moderate
Exhibit 42: PV Volumes pick-up
-3
0
3
5
8
10
120
160
200
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb-
16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Eight Core %YoY (RHS) (%)(index)
-5
-3
-1
1
3
5
7
9
160
170
180
190
200
210
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb-
16
Mar
-16
Apr
-16
May
-16
Jun-
16
IIP %YoY(%)
(index)
(30)
(10)
10
30
50
70
(1,200)
(1,000)
(800)
(600)
(400)
(200)
0
Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16
(Rsbn) Trade Balance (LHS) Import growth Export growth
-10
0
10
20
30
0
20
40
60
80
Apr
-15
May
-15
Jun-
15
Jul-
15
Aug
-15
Sep-
15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb-
16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-
16
CV %YoY (RHS)(%)
('000 nos)
(5.0)
-
5.0
10.0
15.0
20.0
25.0
0
50
100
150
200
250
300
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep-
15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb-
16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6Domestic PV %YoY (RHS)('000 nos)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 20
Diesel consumption growth at 1.8% YoY, petrol at 14.7% YoY in Jul’16: We
observe that petrol consumption accelerated at a healthy pace of 14.7% YoY
(10% YoY) in Jul’16 (Q1FY17) as against diesel, which grew slowly at 1.8% YoY
(4.8% YoY). While fuel demand increased on: a) the expanding PV segment, b)
shift of freight to road, and c) pick up in construction activity, it is expected
to benefit further from the recent rail freight hike.
However, RBI’s capacity utilisation (OBICUS) remained stagnant at an average of
72% in FY16, indicative of weak demand and excess capacity in the system. To
that extent, revival in the private capex cycle seems a distant reality at least in
the near term, implying that continued government spending remains critical. To
conclude, traces of a pick up in growth momentum are evident only in select
sectors and as such broad-based recovery will be only gradual.
Exhibit 43. Eight core industries improve in Jun’16 though growth stagnates in Q1 at -0.1% QoQ
Monthly trend in core industries Trend in QoQ growth
Source: MoSPI, JM Financial
Exhibit 44. Overall IIP remains weak at 0.4% CYTD, declines vis-à-vis Q4FY16
Monthly trend in IIP Trend in QoQ growth
Source: MoSPI, JM Financial
-3
0
3
5
8
10
120
160
200
Apr-1
5
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct
-15
Nov-
15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
Apr-1
6
May
-16
Jun-
16
Jul-1
6
Eight Core %YoY (RHS) (%)(index)
(0.5)
(1.6)
2.7
4.4
(0.1)
(2)
(1)
0
1
2
3
4
5
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
Eight Core Index(%QoQ)
-5
-3
-1
1
3
5
7
9
160
170
180
190
200
210
Ap
r-1
5
May-1
5
Ju
n-1
5
Ju
l-1
5
Au
g-1
5
Se
p-1
5
Oct-
15
No
v-1
5
De
c-1
5
Ja
n-1
6
Fe
b-1
6
Mar-
16
Ap
r-1
6
May-1
6
Ju
n-1
6
IIP %YoY(%)
(index)
(5.5)
(0.3) (0.6)
7.1
(5.1)
(8)
(6)
(4)
(2)
0
2
4
6
8
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
IIP(%QoQ)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 21
Exhibit 45. Tepid global demand continues to weaken Indian exports
Merchandise trade Services trade
Source: CMIE, JM Financial
Exhibit 46. On QoQ basis, both exports and imports improved in Q1FY17
Merchandise trade Trend in engineering goods trade
Source: CMIE, JM Financial
Exhibit 47. Even as CV sales moderate in Jul’16, it grew 14%+ CYTD
CV growth trend QoQ trend in CVs
Source: SIAM, JM Financial
(40)
(10)
20
50
80
(25)
(20)
(15)
(10)
(5)
0
Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
(US$bn)Trade Balance (LHS) Import growth Export growth (%YoY)
(30)
(10)
10
30
0
2
4
6
8
Ap
r-1
2
Jul-
12
No
v-1
2
Feb
-13
Jun
-13
Sep
-13
Jan
-14
May
-14
Au
g-1
4
De
c-1
4
Mar
-15
Jul-
15
Oct
-15
Feb
-16
Jun
-16
(US$bn)Net Services Payment growth Receipt growth
(%YoY)
(4.6)(1.3)
(4.8)
2.2 1.8 3.6 2.4
(7.5)(12.5)
1.5
25.9
9.9
(12.4)
(41.8)
0.3
(50)
(40)
(30)
(20)
(10)
0
10
20
30
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
Exports Imports Trade Balance(%QoQ)
(40)
(30)
(20)
(10)
0
10
20
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Oct
-15
No
v-1
5
De
c-1
5
Jan
-16
Feb
-16
Mar
-16
Ap
r-1
6
May
-16
Jun
-16
Jul-
16
Engineering goods Imports Engineering good exports(%YoY)
-10
0
10
20
30
0
20
40
60
80
Ap
r-1
5
Ma
y-1
5
Jun
-15
Jul-
15
Au
g-1
5
Se
p-1
5
Oct
-15
No
v-1
5
De
c-1
5
Jan
-16
Fe
b-1
6
Ma
r-1
6
Ap
r-1
6
Ma
y-1
6
Jun
-16
Jul-
16
CV %YoY (RHS)(%)
('000 nos)
(30)
(20)
(10)
0
10
20
30
40
50
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
CV MHCV LCV(%QoQ)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 22
Exhibit 48. Passenger vehicles (PV) witnessed healthy sales in Jul’16, though Q1FY17 weaker than Q4FY16
PV growth trend QoQ trend in PVs
Source: SIAM, JM Financial
Exhibit 49. Domestic sales in 2-wheelers have increased 12% CYTD
2-wheelers growth trend 2W witness sharp hike of 8.4% QoQ in volumes
Source: SIAM, JM Financial
Exhibit 50. Even as diesel consumption slows to 1.8% YoY in Jul’16, it increased 7% CYTD
Diesel consumption growth trend Diesel consumption improves marginally in Q1FY17 vs. Q4FY16
Source: PPAC, JM Financial
(5.0)
-
5.0
10.0
15.0
20.0
25.0
0
50
100
150
200
250
300
Ap
r-15
May
-15
Jun
-15
Jul-
15
Au
g-15
Sep
-15
Oct
-15
No
v-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Ap
r-16
May
-16
Jun
-16
Jul-
16
PV %YoY (RHS)('000 nos)
(7.3)
3.6
8.8
(1.8)
(3.6)
(10)
(8)
(6)
(4)
(2)
0
2
4
6
8
10
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
PV(%QoQ)
-5
0
5
10
15
20
25
1,000
1,200
1,400
1,600
1,800
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Oct
-15
No
v-1
5
De
c-1
5
Jan
-16
Feb
-16
Mar
-16
Ap
r-1
6
May
-16
Jun
-16
Jul-
16
2W %YoY (RHS)(000 nos) (%)
3.0
4.2
0.0
1.2
8.4
0
1
2
3
4
5
6
7
8
9
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
2W(%QoQ)
(5)
0
5
10
15
20
25
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Diesel Consumption(%YoY)
9.6
(11.3)
11.2
2.9 3.2
(15)
(10)
(5)
0
5
10
15
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
Diesel Consumption(%QoQ)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 23
Exhibit 51. Petrol consumption increased 14.7% YoY in Jul’16 and 12.9% CYTD
Petrol consumption growth trend QoQ petrol consumption witnesses moderation in Q1FY17
Source: PPAC, JM Financial
Exhibit 52. Cement production slows down in Jul’16, moderation in early Q1FY17 leads to 3.3% QoQ fall
Cement production drops to 1.4% YoY in Jul’16 QoQ trend in cement production
Source: MoSPI, JM Financial
Exhibit 53. Power generation moderates in Jul’16 after 7.2% QoQ, 8.1% YoY growth in Q1FY17
Power generation almost stagnates in Jul’16 Q1 turned out strong for power generation with 7.2% QoQ
Source: CEA, JM Financial
0
5
10
15
20
25
30
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
Petrol Consumption(%YoY)
8.9
(1.3)
2.4
4.7 3.9
(2)
0
2
4
6
8
10
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
Petrol Consumption(%QoQ)
-4
0
4
8
12
16
10
15
20
25
30
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep-
15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb-
16
Mar
-16
Apr
-16
May
-16
Jun-
16
Jul-1
6
(MT) (%YoY)
2.0
(7.7)
1.4
16.7
(3.3)
(10)
(5)
0
5
10
15
20
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
Cement(%QoQ)
-4
0
4
8
12
16
80
85
90
95
100
Ap
r-1
5
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Sep
-15
Oct
-15
No
v-1
5
De
c-1
5
Jan
-16
Feb
-16
Mar
-16
Ap
r-1
6
May
-16
Jun
-16
Jul-
16
(Bn Kwh) (%YoY)
7.1
4.2
(3.7)
1.3
7.2
(6)
(4)
(2)
0
2
4
6
8
Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17
Electricity(%QoQ)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 24
Jul’16 CPI inflation at 6.1%
Retail inflation raises concerns as it reaches 23-mth high
Jul’16 CPI inflation at 6.1% YoY above consensus: Inflation in May’16 came
in at a high of 6.1% YoY (vs. 5.8% last month), 17bps above market
consensus. Food inflation continued to push the overall price index,
contributing over 62% to the hike. The impact was even more pronounced for
the rural (urban) sector where food prices, c.66% (57%) contribution drove
inflation rate to 6.7% (5.4%). Core inflation, i.e., non-food, non-oil inflation,
however continues to remain within comfortable limits at c.4.6% YoY.
Pulses, sugar and vegetables get more expensive: Within the food basket,
the prices of pulses, sugar and vegetables grew extraordinarily by 28.4%,
17.2% and 12.4%, respectively. While in rural areas, pulses witnessed the
highest increase at 27.5% YoY, it was sugar and confectionery products that
witnessed the highest surge of 32%+ YoY. Interestingly, for urban India
prices of vegetables were stagnant YoY.
Inflation expectations: The steady increase in retail inflation FYTD,
increased from 4.9% in FY16 to c.5.8% along with the recent jump in WPI to
c.3.5% YoY (to its 23-month high) are suggestive of a possible build-up of
inflationary pressures given RBIs target of 5% by Mar’17. RBI continues to
keep close watch on the CPI from a policy perspective, as there could be
further upsides as the impact of a pay hike under the 7th
Pay Commission is
felt on disposable incomes.
Exhibit 54. CPI inflation at a glance
Weight (%) Jul16 Jun16 May16 Apr16 Mar16 Feb16
CPI 100.0 6.07 5.77 5.76 5.47 4.83 5.26
Food and beverages 45.9 7.96 7.46 7.20 6.29 5.19 5.52
Pan, tobacco and intoxicants 2.4 6.83 7.35 7.66 8.04 8.51 8.55
Fuel and light 6.8 2.75 2.92 2.94 3.03 3.47 4.59
Housing 10.1 5.42 5.46 5.35 5.37 5.31 5.33
Clothing and footwear 6.5 5.23 5.01 5.37 5.56 5.50 5.60
Miscellaneous 28.3 4.01 3.85 3.96 4.26 4.01 4.38
Source: MoSPI, JM Financial
Exhibit 55. CPI inflation trend
Urban and Rural CPI Inflation All-India CPI Inflation sub-indices
Source: MoSPI, JM Financial
2
4
6
8
10
12
14
De
c-1
2
Mar
-13
Jul-
13
Oct
-13
Feb
-14
May
-14
Sep
-14
Jan
-15
Ap
r-1
5
Au
g-1
5
No
v-1
5
Mar
-16
Jul-
16
(%) India Urban Rural
-2
1
4
7
10
13
16
De
c-1
2
Mar
-13
Jul-
13
Oct
-13
Feb
-14
May
-14
Sep
-14
Jan
-15
Ap
r-1
5
Au
g-1
5
No
v-1
5
Mar
-16
Jul-
16
(%) Food+ Fuel and light Clothing+
Housing Miscellaneous
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 25
Exhibit 56. CPI Inflation trend
Urban CPI Inflation Sub-indices Rural CPI Inflation Sub-indices
Source: MoSPI, JM Financial
Exhibit 57. Contributors to CPI Inflation
All-India CPI inflation sub-indices Rural CPI inflation sub-indices
Source: MoSPI, JM Financial
Exhibit 58. Contributors to CPI inflation and core inflation trend
Urban CPI inflation sub-indices Core inflation has remained in sub-5% levels
Source: MoSPI, JM Financial
-3
0
3
6
9
12
15
18
De
c-1
2
Mar
-13
Jul-
13
Oct
-13
Feb
-14
May
-14
Sep
-14
Jan
-15
Ap
r-1
5
Au
g-1
5
No
v-1
5
Mar
-16
Jul-
16
(%) Food+ Fuel and light Clothing+
Housing Miscellaneous
1
4
7
10
13
16
De
c-1
2
Mar
-13
Jul-
13
Oct
-13
Feb
-14
May-…
Sep
-14
Jan
-15
Ap
r-1
5
Au
g-1
5
No
v-1
5
Mar
-16
Jul-
16
(%) Food+ Fuel and light Clothing+ Miscellaneous
0
20
40
60
80
100
120
Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16
Food+ Fuel+ Clothing+ Housing Misc. Tobacco+
0
20
40
60
80
100
120
Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16
Food+ Fuel+ Clothing+ Misc. Tobacco+
(20)
0
20
40
60
80
100
120
Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16
Food+ Fuel+ Clothing+ Housing Misc. Tobacco+
1
3
5
7
9
11
13
15
17
19
De
c-1
2
Ma
r-1
3
Jul-
13
Oct
-13
Fe
b-1
4
Ma
y-1
4
Se
p-1
4
Jan
-15
Ap
r-1
5
Au
g-1
5
No
v-1
5
Ma
r-1
6
Jul-
16
(%) Food+ Fuel+ Core
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 26
Exhibit 59. RBI’s projection of CPI inflation
% MoM inflation build-up RBI’s targets inflation at 5% by Mar’17
Source: MoSPI, JM Financial, RBI’s Apr’16 monetary policy
Exhibit 60. Key CPI components
Jul-16 Rural Urban All India
Cereals and products 4.27 2.92 3.88
Meat and fish 6.08 7.37 6.57
Egg 6.23 14.31 9.34
Milk and products 4.58 3.21 4.13
Oils and fats 5.29 4.42 4.96
Fruits 3.90 3.16 3.53
Vegetables 12.43 0.25 14.06
Pulses and products 28.40 26.02 27.53
Sugar and confectionery 17.22 32.21 21.91
Spices 8.83 9.43 9.04
Non-alcoholic beverages 5.29 2.87 4.25
Prepared meals, snacks, sweets etc. 6.30 4.88 5.63
Food and beverages 7.92 7.95 7.96*
Pan, tobacco and intoxicants 6.65 7.36 6.83
Clothing 6.52 3.56 5.37
Footwear 5.34 2.71 4.33
Clothing and footwear 6.39 3.42 5.23
Housing - 5.42 5.42
Fuel and light 4.23 0.17 2.75
Household goods and services 5.61 3.35 4.62
Health 4.80 4.22 4.54
Transport and communication 2.02 0.18 1.06
Recreation and amusement 6.10 3.17 4.44
Education 6.51 4.31 5.14
Personal care and effects 7.19 7.43 7.30
Miscellaneous 4.83 3.10 4.01
Source: MoSPI, JM Financial
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
FY14 FY15 FY16 FY17(%MoM)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 27
Other highlights of the month
Q1FY17 GDP grows 7.1% YoY, capital formation remains weak: GDP for
Q1FY17 grew below expectations at 7.1% YoY (vs. 7.9% last quarter) and
actually declined -3.1% QoQ. By components, growth was primarily driven by
consumption expenditure—private consumption (52% contribution to GDP
growth, 6.7% YoY) and govt. consumption (29% contribution, 19% YoY)—while
declining capital formation (-4.6% YoY) dragged economic growth (-23.3% YoY
contribution to growth). This is the second consecutive quarter of falling
capex growth suggesting, as also highlighted in our earlier report (Link), that
cash-rich PSUs may have to step in a big way to cover for the capex shortfall
as private capex remains muted on existing excess capacity and weak
demand RBI’s OBICUS remained stagnant at an average of 72% in FY16. 61.
While SW monsoon slowed down in Aug’16, sowing is progressing well:
After two years of rainfall deficit (-12% in 2014 and -14% in 2015), rainfall
during the 2016 monsoon season has been -3.4% of normal, as of August 30.
After the first week of August, rainfall slowed down, particularly in South
India. IMD so far has not revised down its forecast of 106% of LPA for the
monsoon (Jun–Sept), while private forecaster Skymet is now expecting a
normal monsoon (100% of LPA). However, water level (for 91 reservoirs across
the country) continues to improve, c.11% YoY (as of 25th
Aug). This has helped
in kharif sowing, which is up c.5% YoY, primarily on 34% growth in pulses, 6%
coarse cereals and 3% paddy (rice), even as sugarcane/cotton plantation is
down c.8–9% YoY.62.
GST Bill—passed by Parliament, now closer to becoming a law: In a
landmark decision, the Parliament of India passed the awaited GST bill,
almost 16 years after formal discussions first began (the GST committee was
set up in 2000 by the then central government). Even as finer details like the
GST rate, inclusions/exclusions and more are expected to emerge only in a
few months’ time, states are fast moving to ratify the bill. The fact that 16
state legislatures have already ratified the bill implies that GST law will soon
be a reality. Our earlier note (Link) had highlighted that the auto, cement,
consumer and media (distribution) sectors are likely to be the primary
beneficiaries of GST, while it could have negative impact on telecom and
industrials (power BTG and T&D) sectors.63.
Dr. Urjit Patel to step in as the next RBI Governor: The appointment of Dr.
Urjit Patel, current deputy governor of RBI, as the next governor can be seen in
positive light, particularly from the perspective of foreign investors, as it
strengthens the ground for balanced monetary policy efforts directed towards
strong macroeconomic fundamentals, while ensuring adequate liquidity. 64.
Exhibit 61: Q1 FY17 GDP growth below
expectations
Source: MoSPI, JM Financial
Exhibit 62: PFCE continues to drive growth
Source: MoSPI, JM Financial
Exhibit 63: Sharp increase in Govt.
consumption expenditure in Q1
Source: CMIE, JM Financial
Exhibit 64: Gross fixed capital formation
remains weak
5.0 4.7
6.2
7.7
6.0 6.7
7.5
8.3
6.6
4.4
7.5 7.6 7.2 7.9
7.1
0
1
2
3
4
5
6
7
8
9
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
(%YoY)
6.2
3.2
0.2
2.1
4.0
7.0
8.2
9.2
1.5
4.2
6.9 6.3
8.2 8.3
6.7
0
1
2
3
4
5
6
7
8
9
10
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
(%YoY)
0.7
6.5
11.1
15.0
11.1
(1.4)
8.3
2.2 3.7
10.0
7.1
9.7
1.2
(1.9)(3.1)
(6)(4)(2)02468
10121416
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
(%YoY)
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 28
Exhibit 65. Gross NPA increased for most banks sequentially during 1Q17
Public sector banks 1Q16 2Q16 3Q16 4Q16 1Q17
SBI 4.3% 4.2% 5.1% 6.5% 7.0%
BoB 4.1% 5.6% 9.7% 10.0% 11.2%
PNB 6.5% 6.4% 8.5% 12.9% 13.7%
Union Bank 5.6% 6.1% 7.1% 8.7% 10.2%
Bank of India 6.8% 7.6% 9.2% 13.1% 13.4%
Canara Bank 4.0% 4.3% 5.8% 9.4% 9.7%
Oriental Bank of Commerce 5.7% 5.7% 7.5% 9.6% 11.0%
Private sector banks
Axis Bank 1.5% 1.5% 1.8% 1.8% 2.7%
Federal bank 2.6% 2.9% 3.1% 2.8% 2.9%
HDFC Bank 0.9% 0.9% 1.0% 0.9% 1.0%
ICICI Bank 3.7% 3.8% 4.7% 5.8% 5.9%
IndusInd Bank 0.8% 0.8% 0.8% 0.9% 0.9%
Kotak Mahindra 2.3% 2.3% 2.3% 2.4% 2.5%
Yes Bank 0.5% 0.6% 0.7% 0.8% 0.8%
Source: Company data
Exhibit 66. Net NPA increased across most banks
Public sector bank 1Q16 2Q16 3Q16 4Q16 1Q17
SBI 2.2% 2.1% 2.9% 3.8% 4.1%
BoB 2.1% 3.1% 5.7% 5.1% 5.7%
PNB 4.0% 4.0% 5.8% 8.6% 9.1%
Union Bank 3.1% 3.4% 4.1% 5.2% 6.2%
Bank of India 4.1% 4.3% 5.2% 7.8% 7.8%
Canara Bank 2.7% 2.9% 3.9% 6.4% 6.7%
Oriental Bank of Commerce 3.7% 3.5% 4.8% 6.7% 7.8%
Private sector banks
Axis Bank 0.5% 0.5% 0.8% 0.7% 1.2%
Federal Bank 1.0% 1.3% 1.7% 1.6% 1.7%
HDFC Bank 0.3% 0.2% 0.3% 0.3% 0.3%
ICICI Bank 1.6% 1.6% 2.3% 3.0% 3.3%
IndusInd Bank 0.3% 0.3% 0.3% 0.4% 0.4%
Kotak Mahindra 1.0% 1.0% 1.0% 1.1% 1.2%
Yes Bank 0.1% 0.2% 0.2% 0.3% 0.3%
Source: Company data
India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 29
APPENDIX I
JM Financial Institutional Securities Limited
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Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.
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Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.
Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: jmfinancial.research@jmfl.com | www.jmfl.com
Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: sunny.shah@jmfl.com
Definition of ratings
Rating Meaning
Buy Total expected returns of more than 15%. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.
Sell Price expected to move downwards by more than 10%
Research Analyst(s) Certification
The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:
All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their
securities; and
No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed
in this research report.
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information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the
purpose of information of the select recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or
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JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst, Merchant Banker
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While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities,
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India Strategy 6 September 2016
JM Financial Institutional Securities Limited Page 30
herein may be changed without notice and JM Financial Institutional Securities reserves the right to make modifications and alterations to this
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